Avianca: the Columbian Airline - Essay Example

VISION – The case of Avianca A B S T R A C T Avianca, the Columbian airline that started in 1919, has weathered through rough times due to various reasons. After economic downturn and seeking protection under Chapter 11 from creditors in US, it managed to regain its position with fresh equity by the Synergy Group. With its hub in Bogota, it serves and interconnects with various airlines and networks. It has five subsidiaries under it. Today Avianca serves 19 domestic destinations and 21 international destinations. Its code share partners include Air Canada, Air France, Delta Air Lines, TACA, and Iberia among others. It now invests in latest technology to serve the customers better both in services and prices. Its Vision for 2010 is to be the Leading Airline of America. Avianca, the airline of Colombo, was the first airline to be founded in the American continent and the second one in the world, and started as Sociedad Colombo-Alemana de Transporte Aéreo, SCADTA on 5th December 1919. It performed its first flight between Barranquilla and the nearby town of Puerto Colombia, aboard a Junker F-13, which also carried 57 letters (Avianca.com). It started operating on international routes by mid 1920s and initially covered destinations in Venezuela and the United States. On 14th June 1940 it was renamed as Avianca. Since then airline has contributed to the construction and development of Columbia. Avianca was a stable and dependable airline and had a steady growth until the late 1990s. This paper will discuss the reasons that led to the decline, instability and losses, and how the airline fought itself back to the current position. Services and routes Over the years, Avianca expanded its route to include South America, Central America, the United States, the Caribbean, Mexico, and parts of Europe. Its fleet included Boeing 757, and Boeing 767, MD-83, Fokker 50. In 1994, a strategic alliance was established between three most important enterprises of the aeronautical sector of Colombia: Avianca, SAM (acronym of Sociedad Aeronáutica de Medellín), and Helicol (acronym of Helicópteros Nacionales de Colombia). This merger offered specialized services in Cargo (Avianca Cargo) and mail (Postal Services), and had the most modern aircraft fleet in Latin America (Wikipedia. n.d.). In December 1998, Avianca opened its hub in Bogota to serve passengers in Columbia and the world. It allowed travelers to access near 6,000 weekly possible connections, and greater number of frequencies, schedules and destinations served. It also had code share agreements with Delta, Air Canada, Iberia, Mexicana, Taca (WUH, 2001). It also has domestic and charter operations. Competition and decline Gradually, the dominant position that Avianca enjoyed, started eroding by 1997 when it carried 42 per cent of all domestic passengers, more than twice its nearest rival, but down from 59 per cent in 1991 (Knibb, 1997). Avianca incurred $187 million losses in 2000, debts increased to $567.1 million by the first quarter of 2001 despite an infusion of $180 million over the last two years made by main shareholder Valores Bavaria (Emma, 2001). In 2001, Avianca’s losses worsened and the operating deficit more than doubled to $82 million during the first half of 2001, despite a 7% increase in revenues (AB, 2001). The reasons for this state were heavy competition from other players in the field. Columbians by nature being optimistic do not want to accept that their airlines were on the verge of shrinking. In the early 1990s, the government approved new airlines, awarded new routes, and stopped policing fares. Aces, traditionally a turboprop operator serving coffee plantations, leased jets and launched a Colombian route network with more destinations than any other airline. Little Aero Pesca became Inter- continental Colombia with a fleet of leased DC-9s (Knibb). AeroRepublica was formed by an ex-SAM executive. A change in the government ended liberalization and the new government approved no new airlines. By this time the competition forces were already in place that kept adding capacity and cutting fares, creating fare wars. After cutback in local service in 1995, the five domestic jet operators have been locked in a market share struggle. Aces share grew to 18% with 180 daily flights -more than any other Colombian carrier while AeroRepublica had 17% share of the traffic and SAM 13%. Intercontinental had only 7% share with its fares 10% lower than its rivals. Each of these airlines operated on some international routes although this was not a competition for Avianca. During this period Columbia’s economy was decelerating and the immediate effect was a 12.5 per cent drop in first quarter air traffic (Knibb). This resulted in another fare war. At the same time, government regulations posed another challenge. The airlines had to comply with Icao standards and recertification was necessary for every airline. Those with low capital and fast growth suffered most. Reasons like these forced Avianca to look elsewhere for protection. Reasons that led to filing for protection under Chapter 11 In late 1999, when Avianca was facing serious difficulties, it responded by negotiating with its principal lessors and lenders, most of who were located in USA (Ressler, 2005). In September 2000, it reached interim accommodation agreements but its revenues were still insufficient to meet its cost structure. It then initiated a number of cost saving measures including formally restructuring its relations with its lessors and lendors. The condition of the airlines worsened and the September 11 had a very negative impact on the entire aviation industry. Unforeseen market and economic conditions added to the challenges and the net effect on the airlines was devastating. Increase in fuel prices, slowdown in US economy, and continued contraction in travel forced airlines to drastically cut costs (Rueda, 2003). Avianca too suffered in the process. It was the combined effect of increased competition, less traffic and more regulations, which brought the airline to this state. New airlines came in without rules, infrastructure and capital. Instability was the driving force behind the various decisions that Avianca was forced to take. At the same time, passenger traffic in the international market decreased between 20 and 30% while insurance costs increased by 450% (Ressler). Avianca and ACES initially wanted to go in for a merger and required USD90m in fresh capital. They decided to raise up to USD45m through a previously announced preferential share issue. The rest of the capital would reportedly come from loans. Colombian anti-trust regulators approved the merger of Avianca and Aces on 12 December 2001 (AIIa, 2002). Survival instincts after September 11 prompted them to create a single viable airline in the face of dramatically reduced traffic. Instability was the driving force behind the merger and ACES asked it to restructure its debts before the deal was through (AB, 2001). Technology, distribution and marketing services provider Sabre Holdings formed an alliance of Avianca, ACES Columbia and SAM in 2002 after a careful and complex process to improve their operational efficiencies and increase their revenues. It would have helped them in pricing and revenue management, flight scheduling, network and fleet planning, financial planning and control, sales, distribution, branding, loyalty and competitive positioning (AII, 2002) but increases in insurance premiums, fuel costs, the heavy devaluation of the Colombian peso and US visa restrictions took a heavy toll on the alliance. The positive effects of the alliance were offset due to the September 11 attack. Devaluation of the Colombian Peso, reduction in travel worldwide and weak economies in countries like Venezuela and Argentina, further complicated the situation (Rueda). Avianca decided to cut 30% of its fleet capacity, drop loss making routes and shed staff to achieve a reduction of $32.4 million in annual operating costs. It had to return several aircrafts back which translated into network cuts and frequency reductions in both domestic and international routes. As a consequence, the airline also had to make 2300 employees redundant (Jackson, 2003). New visa requirements for Columbian citizens and higher aircraft leasing rates in Columbia further aggravated the situation (Ressler). Columbia was also faced with a difficult situation with public order and terrorist attacks (Avianca.com). In November 2003, the alliance was forced to dissolve due to adverse circumstances in the industry and market. The shareholders then decided to concentrate their efforts in strengthening the Avianca trademark. This resulted in the liquidation of ACES and acquisition of SAM as a regional carrier under Aviancas system. Protection under Chapter 11 To consolidate its position, the alliance had to improve its financial position to remain competitive. The initiatives required significant belt-tightening. Unable to meet the aircraft lease payments, Avianca filed for bankruptcy protection under Chapter 11 as it needed legal protection from its creditors. It filed under US bankruptcy protection as most of its debts are in USA (Doyle, 2003). The C-11 measure has been designed by the United States law offers protection to help companies restructure and reorganize themselves to get back to normal business. Avianca presented a plan for financial reorganization to the Court. By virtue of having assets and a place of business in the United States, Avianca was eligible to be debtors under the Bankruptcy Code but within a month, two its creditors filed separate motions to dismiss Avianca’s bankruptcy case. They argued that the right forum for this was Columbia and filing in US was meant to prejudice the creditors (Ressler). The creditors’ committee supported Avianca as majority of its largest creditors were subject to the U.S. Bankruptcy Court’s jurisdiction. It thus gained the right to end or renegotiate any contract within United States and start the reorganizing process (Avianca.Com). This immediately allowed Avianca to redesign its network of routes, focus on the most profitable markets, renegotiate and simplify the fleet, and speed up the process. Cost reduction measures were implemented and the team was optimized. While being restructured, Avianca received another blow when its pilots instigated work to rule in a dispute over redundancies (Flight, 2003). The pilots were upset over union-negotiated wage increase and monthly flight hour workload changes. They then instigated the industrial action after the laying off of 350 employees, including 96 pilots. The revolt resulted in cancellations and delays which caused a further loss of $3 million. Avianca was further forced to lease aircrafts in order to honor its international schedules. Takeover bid At the same time, Avianca increased its operations all around the world by signing code sharing agreement with several major airlines like Iberia, Delta Air Lines and Lacsa (Avianca.com). It also brought about dynamic innovative changes in its services. During its reorganization plans, Avianca received bids from several organizations to invest in the airline. Despite being one of the most recognizable names in Latin America, it had no choice but to team up with a stronger carrier. Several Latin carriers bid for the airline but it was narrowed down to Brazil’s Synergy Group and Copa Airlines, backed by Continental Airlines. Synergy Group was an evidenced, credit-worthy Brazilian entrepreneurial conglomerate. Its strength lies in the oil sector, building, installing, and offering maintenance to offshore oil platforms (Allexperts, 2006). Copa’s terms were highly conditional and they even refused to raise the initial offer. Copa and Avianca had long and contentious rivalry and Avianca feared that if Copa won the deal, it would relegate Bogota, Colombias capital and Aviancas base, into a spoke serving Copas Panama hub (AB, 2004). Under terms of Copa, it would continue to operate as an independent airline. Synergy, on the other had for a stake of 75% would clear of $300m debts of Avianca. Avianca’s unsecured creditors were against this deal although no reason was given. Synergy’s equity helped Avianca to leave Chapter 11 bankruptcy protection (AB, 2004). The bid was backed by a committee of Avianca’s unsecured creditors. This move to take over signified the latest trend in Latin America - the reinvention of airlines into sleeker, no-frills carriers and the consolidation of weaker airlines with financially stable carriers intent on becoming regional powers (Forero, 2004). Through this takeover, the Synergy Group conglomerate intended to offer expanded services to Brazilians from cities like Recife and Salvador, to international destinations like New York. Till then they had to travel south to big airports in São Paulo and Rio de Janeiro before heading north. Avianca was offering 300 flights a day at that time and this bid would enable the Group to extend its reach inside Latin Americas largest country while offering the possibility of connections between Bogotá, Colombia and other important cities. Earlier in 2004, German Efromovich had bought 50% of Avianca from the Colombian businessman Julio Mario Santo Domingo making it possible for the airline to exit bankruptcy. Efromovich had bought further 25% from Coffee Growers Federation (CGF). In 2005, the balance 25% with CGF was also sold to Efromovich under an agreement (AII, 2005). After 75% stake acquired in 2004, Efromovich launched Synergy Aerospace, an ambitious project to dominate the skies of Latin America. This umbrella organization would include Efromovichs airlines, namely Brazils Ocean Air, Colombias Avianca, Ecuadors VIP SA and recently announced Wayra Peru. This synergy is expected to benefit in joint purchasing, asset management and route coordination. To change the image of the airline, Efromovich has brought in two senior professionals from the industry. These include Fabio Villegas, a financial expert and ex-Colombian government minister, as the President of the reborn Avianca, and Juan Emilio Posada, who steered Avianca through Chapter 11 and into its first profits in years, to head the Synergy Aerospace. The pilots may not share the same enthusiasm as Efromovich as they had also tried to prevent the takeover at the last minute (FI, 2005). After the takeover, the name too was changed with a view to broaden the airline’s geographic scope without compromising on its well known brand. Avianca now stands for "Aerovias del Continente Americano", or "Airways of the American Continent", instead of "Aerovias Nacioina les de Colombia", or "Colombian National Airways" (AB, 2005). The consolidation process and current status Avianca managed to have its technical and operational procedures in place and its international certification endorsed the quality of its procedures and standards for Safety, in its maintenance, training and aeronautical assistance services. It now has more than 5,000 direct Collaborators, and a fleet consisting of Boeing B-767, Boeing B-757, McDonell Douglas MD-83 and Fokker F-50. Under its new image, it renewed the values and attributes of the country and committed itself to provide a safe&secure, warm, on-time and flexible service. It set forth to start a new chapter in the history of the company (Avianca.com). Marketing Avianca introduced innovative marketing plans once it recovered from its restructuring plans. Today they have a Frequent Traveler Program which identifies the clients as members of AviancaPlus where miles are accrued for every trip made. Miles are also accrued for purchasing products and services of companies associated with the program like hotels, banks and car rentals. They have four different levels and benefits depend upon the miles accrued. In addition, Avianca rewards the loyalty of its Corporate Clients who, in addition to the institutional products and services, are offered a series of benefits that optimize the resources of the companies. This is offered to those corporate clients who displace employees in routes covered by Avianca and who have a minimum amount of Col. $6,000,000.oo a quarter. They also have a loyalty program where they award prizes to the most loyal clients in Colombia who make reservations and purchase of domestic and international air tickets for the executives of their company. The Business Class travelers have an exclusive cabin with more comfortable seats, wider spaces, wider variety of foods, beverages and snacks and many options for entertainment. To step up its service, Avianca offers e-ticketing, which is a paperless ticket. E-ticket purchasers also have an advantage of e-check in, which means easier, faster and comfortable check in from the comfort of one’s home or office. They are allotted boarding pass online. They also offer telecticketing where the paper ticket is physically delivered to their homes against a fee. They offer SMS service for flight arrival, departures and any operational changes. They offer special fares and services for conventions. They also disseminate information through their website. Their interactive website also offers information about itineraries, frequencies, fees, miles, online products such as e-tickets. Their VIP lounge offers passengers the facility for food and beverage service, areas for meetings and relaxing, and free connection to the internet via Wi-Fi technology. Express check-in facility is available in all national routes with prior reservation and with or without baggage. Up-gradation with IT systems Avianca has adopted the ProfitLine/Price from Lufthansa Systems (Lhsystems, 2005). This integrated software solution supports in the fast, flexible and cost-effective design and monitoring of its pricing structures. This user-friendly concept enables Avianca to generate fare systems and publish them in the relevant systems quickly and efficiently. This system helps forecasts the impact of fare changes on revenues, which enables Avianca to react faster to the market conditions than its competitors. The software provides real time information and analyses of the prices and fare structure of the competitors against its own data. This aids in reactive and proactive pricing. Customer support is ensured 24x7 which means excellent, long-lasting customer relations with the Columbian airline. Avianca airline keeps investing in technology as is evident from its contract worth USD 9.1m to Global ePoint Inc. These supplies would help to enhance the airlines security and lower its fuel consumption. Avianca provides in-flight entertainment and has in-seat laptop computers (AIIa, 2005). Flight schedules and code sharing As of August 2006, Avianca serves 19 domestic destinations and 21 international destinations. New flights from Medellin to different destinations are slotted to begin in December 2006. It does not plan to expand its European network beyond the cities it already serves. Its code share partners include Air Canada, Air France, Delta Air Lines, TACA, and Iberia among others. With dedicated service and daily international departures, Avianca has proven itself as a leader in world travel. Today Avianca is a world class airline. They believe in providing service beyond expectations and at competitive rates. They hold all international certification apart from certificates by Colombia’s Civil Aviation Authority and ISO 9001:2000 certifications for Engineering and Maintenance procedures. Their hub in Bogota allows various domestic and international destinations to be interconnected. This in-depth study of Avianca reveals that despite being affected by market and economic conditions, the airline regained its status and market position. It could withstand competitive forces due to its product differentiation and strong marketability. It had the backing of the lessors and lendors from USA which supported the airline in regaining a fresh lease of life. Its foundation was based on strong corporate values and they responded to the changing times. Their vision for 2010 is to the leading Airline of Latin America and the way they are expanding in every direction, they are sure to fulfill their vision. 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(2003), International Market Reseaech Reports, 06 Dec 2006 Wikipedia (n.d.), Avianca, 06 Dec 2006 WUH (2001), Western Union Holdings, Participating Companies, 06 Dec 2006 Read More